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February 6, 2013

Vanguard Tinkers With 20 Funds, Including TDFs

The moves will add a hedged international bond fund to 20 of its fund-of-fund portfolios and a TIPS fund to three portfolios

(Photo: AP)

[Editor's note: This version corrects an earlier story that contained an error describing the relationship between the new bond fund and three major index funds.]

Vanguard said Wednesday it was tweaking the asset mix of 20 funds, including several target-date retirement funds, “to further diversify these broad, balanced portfolios” and to incorporate the new Vanguard Total International Bond Index Fund, now in registration with the SEC.

“We make changes to our Target Retirement Funds and other funds of funds only after careful analysis and when we’ve identified long-term benefits for investors,” said Vanguard Chief Investment Officer Tim Buckley, in a press release. The moves should “better dampen volatility for pre-retirees and retirees, for whom diversification on the fixed income side matters most.”

In addition, the company says the Vanguard Short-Term Inflation-Protected Securities Index Fund will replace the Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010, and 2015 Funds.

The overall strategic asset allocation and glidepath of the Target Retirement Funds will not change, according to Vanguard, and the changes should be wrapped up by June 30.

Vanguard says that only one fund could experience a change in its expense ratio: the LifeStrategy Income Fund, which could experience an estimated one-basis-point increase. (Current expense ratios are 0.16% to 0.18% for the Target Retirement Funds, 0.13% to 0.17% for the LifeStrategy Funds, and 0.34% to 0.46% for the Managed Payout Funds.)

“The addition of hedged international bonds represents a refinement of the funds’ fixed income component, bringing long-term diversification benefits,” the company said in a statement. “An allocation to short-term TIPS provides retirees and pre-retirees with improved inflation protection with less volatility.”

New Bond Fund

The Total International Bond Index Fund will seek to track the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (U.S.-dollar hedged). The index includes about 7,000 high-quality corporate and government bonds (average credit quality AA2/AA3) from 52 countries.

The new fund will represent roughly 20% of the fixed income allocation of the 20 funds-of-funds, with an overall allocation weighting of 2-16% of total fund assets. It will assume an initial 6% weighting in Vanguard’s largest all-in-one fund—the $20 billion Vanguard Target Retirement 2025 Fund.

According to David Falkof (left), a mutual fund analyst with Morningstar in Chicago, a recent Vanguard study on bond found that adding global bonds to some portfolios can provide some diversification benefit, though exposure to foreign-currency fluctuations does put them at risk. “This means Vanguard found it can make sense to diversify in the fixed-income area, but let’s do it in a way that is hedged to the U.S. dollar,” Falkof said in an interview with AdvisorOne.

Adding its new fund, he says, can be considered a smart move for a number of reasons—namely that investors can get higher yields from foreign bonds. Plus, these bonds respond differently in relationship to a diverse set of monetary and related economic issues.

“This is a reasonable decision” for Vanguard,” Falkof said. “It makes sense to broaden the diversification of its fixed-income portfolios.”

TIPS Targets

The Short-Term TIPS Fund will have initial weightings in the Target Retirement Income, 2010 and 2015 funds of 17%, 11%, and 4%, respectively. The Short-Term TIPS Fund has an average duration of less than three years vs. 8.5 years for the Inflation-Protected Securities Fund.

“This is also an interesting change,” said Falkof, “but it’s more nuanced.” With this move, Vanguard is making a case that short-term TIPS offer protection against exposure to higher interest rates, he explained. “So, it makes sense if you are worried about investor sensitivity to interest rates, though Vanguard has not historically made calls on this.”